The Hindu Business Line : Margining system

A portfolio based margining model (SPAN), would be adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on the derivatives segment.

The initial margin would be based on worst-case loss of the portfolio of a client to cover 99 per cent VaR over two days horizon. The initial margin would be netted at client level and shall be on gross basis at the trading/clearing member level. The portfolio will be marked to market on a daily basis.

How will the assignment of options takes place?

On exercise of an option by an option holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm.

What does an investor have to do if he wants to trade in options?

An investor has to register himself with a broker who is a member of the BSE Derivatives Segment. If he wants to buy an option, he can place the order for buying a Sensex call or put option with the broker. The premium has to be paid up-front in cash. He can either hold on to the contract till its expiry or square up his position by entering into a reverse trade.

If he closes out his position, he will receive premium in cash, the next day. If the investor holds the position till expiry day and decides to exercise the contract, he will receive the difference between the option settlement price and the strike price in cash. If an investor wants to write/ sell an option, he will place an order for selling Sensex call/put option.

Initial margin based on his position will have to be paid up-front (adjusted from the collateral deposited with his broker) and he will receive the premium in cash, the next day. Everyday his position will be marked to market and variance margin will have to be paid. He can close out his position by buying the option by paying requisite premium. The initial margin, which he had paid on the first position, will be refunded. If he waits till expiry, and the option is exercised, he will have to pay the difference in the strike price and the options settlement price, in cash. If the option is not exercised, the investor will not have to pay anything.

(Source: www.bseindia.com)

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